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Week 8
- 1. Week 7 Chapter 19 (I) Balanced Scorecard: Quality 1
- 3. Big Picture Activity-Based versus Strategic-Based Responsibility Accounting 3 Responsibility Accounting Financial-based centers (Cost, Revenue, Profit, Investment) Strategy-based Responsibility accounting system translates the strategy of the organization into operational objectives and measures Which one is bottom up/top down? Activity-based AB system adds a process perspective to the financial perspective of the functional-based responsibility accounting system.
- 4. 1. Familiarization 2. Learning Objectives 3. Game Objectives 17 Quarters Highest profit Diary One-Page summary of learning Chapter 12 14 19 Accounting Customer Internal Strategy Systems Thinking Measurement 4
- 5. 5 Week 7-8 Learning Outcome Summary Introduction Quality-Definition Quality-Measurement Learning objective 1: Explain the four cost categories in a costs-of- quality program Learning objective 2: Develop Nonfinancial measures and methods to improve quality Learning objective 3: Use cost of quality measures to make decisions Learning objective 4: Use financial and nonfinancial measures to evaluate quality Time-related Measurement Learning objective 5: Describe customer-response time and on-time performance Learning objective 6: Describe why delay occurs and their costs Learning objective 7: Use financial and nonfinancial measures of time Learning objective 8: Theory of Constraints Introduction Quality-Definition Quality-Measurement BSC Time-Related Measures Theory of ConstraintsTime-related Measures
- 7. 7 Define it Product quality dimensions Design Conformance Service quality Measure it Financial Customer Internal Learning and Growth Use it Competing on Quality Introduction Quality-Definition Quality-Measurement BSC Time-Related Measures Theory of ConstraintsTime-related Measures
- 8. 8
- 9. Week 8 Chapter 19 (II) Balanced Scorecard: Time 9
- 10. 10 Week 7-8 Learning Outcome Summary Introduction Quality-Definition Quality-Measurement Learning objective 1: Explain the four cost categories in a costs-of- quality program Learning objective 2: Develop Nonfinancial measures and methods to improve quality Learning objective 3: Use cost of quality measures to make decisions Learning objective 4: Use financial and nonfinancial measures to evaluate quality Time-related Measurement Learning objective 5: Describe customer-response time and on-time performance Learning objective 6: Describe why delay occurs and their costs Learning objective 7: Use financial and nonfinancial measures of time Learning objective 8: Theory of Constraint Introduction Quality-Definition Quality-Measurement BSC Time-Related Measures Theory of ConstraintsTime-related Measures
- 11. 11 What is the Cost of Time? VF Corporation Example Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 12. 12 Time as a Competitive Element Factors affecting Cost Management Time is the crucial element in all phases of the _____ chain. Decreasing non-__________ time appears to go hand-in-hand with increasing quality. Significance – How long does it take to make a car? Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 13. 13 Time as a Competitive Element Factors affecting Cost Management Time is the crucial element in all phases of the value chain. Decreasing non-value-added time appears to go hand-in-hand with increasing quality. Significance – How long does it take to make a car? Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 14. 14 Car Manufacturing GERMANY: VW aims for 30% reduced manufacturing time on next Polo 4 April 2006| Source: just-auto.com editorial team Volkswagen engineers are aiming to reduce manufacturing time by 30% on the next Polo (due 2008), to reduce costs, according to auto motor and sport magazine. Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 15. 15 Car Manufacturing How long to make a car? 10 hours 15 hours 18 hours 24 hours (One day) 36 hours 48 hours (Two days) 60 hours Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints LUCY CHOCOLATE FACTORY https://www.youtube.com/watch?v=8NPzLBSBzPI
- 16. 16 Companies view time as a driver of strategy Operational measures of time: how quickly firms respond to customers’ demand for their products and services, and their reliability in meeting scheduled delivery dates Time as a Competitive Tool Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints Learning Outcome 5: Describe customer-response time … time between receipt of customer order and product delivery and on-time performance … delivery of product at the time it is scheduled And why delays occur …uncertainty about the timing of customer orders and limited capacity. (P767) Learning Outcome 6: Determine the costs of delays …lower revenues and higher inventory carrying costs.(P771) 5
- 17. 17 Why Quality and Time? Time based competition Time Drivers -Customer demand (when?) -Production uncertainty (bottlenecks) Activity Bottlenecks - BSC Time-Related Measures - Relevant costs = Direct materials - MA1 relevant costs = future and variable Measures -Customer delivery -Customer Response time (CRT) -RT + PT+DT Managing Expectations (SCA) - Marketing - Promises on delivery time and service standards Action - Increase capacity - Outsource - Marketing Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 18. 18 1. Customer-Response Time – how long it takes from the time a customer places an order for a product or service to be delivered to the customer 2. On-Time Performance – delivering a product or service by the time it was scheduled to be delivered Two Operational Measures of Time Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 19. Example: Customer-Response Time 19 Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 20. Time Driver 20 Time Driver is any factor in which a change in the factor causes a change in the speed of an activity Two Time Drivers: Uncertainty about when customers will order products and services Bottlenecks due to limited capacity. A bottleneck occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 21. Exercise : Waiting time, banks • Regal bank has a small branch in Orillia, Canada. • The counter is staffed by one teller. • The counter is open for five hours (300 minutes) each day (the operating capacity). • It takes 5 minute to serve a customer (service time). • The Orillia branch expects to serve 40 customers each day. (Note that the number of customers corresponds to the number of orders in the chapter discussion.) 21 Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 22. Exercise : Waiting time, banks 1. Using the formula on page 635, calculate how long, on average, a customer will wait in line before being served. 2. How long, on average, will a customer wait in line if the branch expects to serve 50 customers each day? 3. The bank is considering ways to reduce waiting time. How long will customers have to wait, on average, if the time to serve a customer is reduced to four minutes and the bank expects to serve 50 customers each day? 22 Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 23. Solutions = = 23 1.If the branch expects to receive 40 customers each day and it takes 5 minutes to serve a customer, the average time that a customer will wait in line before being served is: Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 24. 1.If the branch expects to receive 40 customers each day and it takes 5 minutes to serve a customer, the average time that a customer will wait in line before being served is: Solutions = 5)](40[3002 ](5)[40 2 )200300(2 )2540( 1002 000,1 200 000,1 == = 5 minutes 24 customeraserve taken toTime customersof numberAverage openiscounter timeAvailable 2 customeraserve taken toTime customersof numberAverage 2 = Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 25. Solutions 25 2. If the branch expects to receive 50 customers each day and the time taken to serve a customer is 5 minutes, the average time that a customer will wait in line before being served is: Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 26. 2. If the branch expects to receive 50 customers each day and the time taken to serve a customer is 5 minutes, the average time that a customer will wait in line before being served is: )]550(300[2 ])5(50[ 2 = )250300(2 )2550( 502 2550 100 250,1 Solutions = 12.5 minutes = = = 26 Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints customeraserve taken toTime customersof numberAverage openiscounter timeAvailable 2 customeraserve taken toTime customersof numberAverage 2
- 27. Solutions 27 3. If the branch expects to serve 50 customers each day and the time taken to serve a customer is 4 minutes, the average time that a customer will wait in line before being served is: Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 28. 3. If the branch expects to serve 50 customers each day and the time taken to serve a customer is 4 minutes, the average time that a customer will wait in line before being served is: = 4 minutes )]450(300[2 ])4(50[ 2 )200300(2 )1650( 1002 1650 = = Solutions 28 Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints customeraserve taken toTime customersof numberAverage openiscounter timeAvailable 2 customeraserve taken toTime customersof numberAverage 2
- 29. Four Steps in Managing Bottleneck Operations 1. Recognize that the bottleneck operation determines throughput contribution of the entire system 2. Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on 3. Keep the bottleneck operation busy and subordinate all non-bottleneck operations to the bottleneck operation 4. Take actions to increase the efficiency and capacity of the bottleneck operation. The outcome is to increase the difference between throughput contribution and the incremental costs of increasing efficiency and capacity 29 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures
- 30. Methods to Relieve Bottlenecks Eliminate idle time at the bottleneck operation Process only those parts or products that increase throughput contribution, not parts or products that will remain in finished goods or spare parts inventories Shift products that do not have to be made on the bottleneck operation to non-bottleneck processes, or to outside processing facilities 30 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures
- 31. 31 The Balanced Scorecard and Time-Related Measures Financial Measures • Revenue losses or price discounts attributable to delays • Carrying costs of inventories • Throughput contribution minus operating costs Customer Measures • Customer-response time • On-time performance Internal Business Process Measures • Average manufacturing time for key products • Idle time at bottleneck operations • Defective units produced at bottleneck operations • Average reduction in setup time and processing time at • bottleneck operations Learning and Growth Measures • Employee satisfaction • Number of employees trained in managing bottleneck operations Time-related Measures Theory of ConstraintsQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Learning Outcome 5: Learning Outcome 7: Use financial and nonfinancial measures of time…nonfinancial measures are leading indicators of future financial effects of delays (P772) 7
- 32. 32 The Theory of Constraints (TOC) describes methods to maximize operating income when faced with some bottleneck and some non-bottleneck operations TOC focuses on a short-run time horizon and assumes that operating costs are fixed costs Throughput Contribution equals revenues minus the direct material cost of the goods sold Theory of Constraints and Throughput Contribution Analysis Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Learning Outcome 8: Apply the three measures in the theory of constrains … throughput contribution, investments, and operating costs 8
- 33. 33 Where does TOC fit into executing strategy? Time based competition Time Drivers -Customer demand (when?) -Production uncertainty (bottlenecks) Activity Bottlenecks - BSC Time-Related Measures - MAII TOC relevant costs = Direct materials - MAI relevant costs = future costs and variable costs Measures -Customer delivery -Customer Response time (CRT) -RT + PT+DT Managing Expectations (SCA) - Marketing - Promises on delivery time and service standards Action - Increase capacity - Outsource - Marketing Time-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Theory of Constraints
- 34. Exercise : Theory of constraints, throughput contribution, relevant costs The Mayfield Corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information. Each cabinet sells for $72 and has direct material costs of $32 incurred at the start of the machining operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. Machining Finishing Annual capacity 100,000 units 80,000 units Annual production 80,000 units 80,000 units Fixed operating costs $640,000 $400,000 (excluding direct materials) Fixed operating costs per unit produced ($640,000 ÷ 80,000; $400,000 ÷ 80,000) $8 per unit $5 per unit 34 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Price $72
- 35. 35 Which operation is a bottleneck operation What is the throughput contribution per unit? 1. $72-$32 = $40 per unit Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Price $72 Exercise : Theory of constraints, throughput contribution, relevant costs
- 36. 1. A new machine (cost $30,000) can increase throughput by 1000 units – 1. What is the benefit? 2. What is the cost? 3. Should Mayfield acquire the machine? Should Mayfield acquire the machine? Increase in throughput contribution ($72 – $32) 1,000 $40,000 Incremental costs of the jigs and tools 30,000 Net benefit of investing in jigs and tools $10,000 36 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Price $72 Exercise : Theory of constraints, throughput contribution, relevant costs
- 37. 3. An outside contractor offers to do the finishing operation for 12,000 units at $10 per unit, double the $5 per unit that it costs Mayfield to do the finishing in-house. Should Mayfield accept the subcontractor’s offer? Show your calculations. 37 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Price $72 Exercise : Theory of constraints, throughput contribution, relevant costs
- 38. 38 3. An outside contractor offers to do the finishing operation for 12,000 units at $10 per unit… Finishing is a bottleneck operation. Therefore, getting an outside contractor to produce 12,000 units will increase throughput contribution. Increase in throughput contribution ($72 – $32) 12,000 $480,000 Incremental contracting costs $10 12,000 $120,000 Net benefit of contracting 12,000 units of finishing $360,000 Mayfield should contract with an outside contractor to do 12,000 units of finishing at $10 per unit because the benefit of higher throughput contribution of $480,000 exceeds the cost of $120,000. The fact that the cost of $10 per unit is double Mayfield's finishing cost of $5 per unit is irrelevant. Solutions Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures
- 39. 4. The Hunt Corporation offers to machine 4,000 units at $4 per unit, half the $8 per unit that it costs Mayfield to do the machining in – house. Should Mayfield accept Hunt’s offer? Show your calculations. 39 Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures Exercise : Theory of constraints, throughput contribution, relevant costs
- 40. 40 4. The Hunt Corporation offers to machine 4,000 units at $4 per unit… Operating costs in the Machining Department of $640,000, or $8 per unit, are fixed costs. Mayfield will not save any of these costs by subcontracting machining of 4,000 units to Hunt Corporation. Total costs will be greater by $16,000 ($4 per unit ´ 4,000 units) under the subcontracting alternative. Machining more filing cabinets will not increase throughput contribution, which is constrained by the finishing capacity. Mayfield should not accept Hunt's offer. The fact that Hunt's costs of machining per unit are half of what it costs Mayfield in-house is irrelevant. Solutions Theory of ConstraintsTime-related MeasuresQuality-MeasurementIntroduction Quality-Definition BSC Time-Related Measures
- 41. 41 Summary Introduction Quality-Definition Quality-Measurement Learning objective 1: Explain the four cost categories in a costs-of- quality program Learning objective 2: Develop Nonfinancial measures and methods to improve quality Learning objective 3: Use cost of quality measures to make decisions Learning objective 4: Use financial and nonfinancial measures to evaluate quality Time-related Measurement Learning objective 5: Describe customer-response time and on-time performance Learning objective 6: Describe why delay occurs and their costs Learning objective 7: Use financial and nonfinancial measures of time Learning objective 8: Theory of Constraints Introduction Quality-Definition Quality-Measurement BSC Time-Related Measures Theory of ConstraintsTime-related Measures